With defensive sectors like consumer staples setting new all-time highs and consumer cyclicals like Energy and Consumer Discretionary struggling over the past year there have been increasing interests in Wall Street and Main Street as to this discrepancy and most important, the consequences, if any, on the US economy and on the financial markets.
Since consumer cyclicals and staples follow different business cycles they often outperform and underperform their counterparts at various phases of its cycles. Many investors look for discrepancies between these two key sectors for clues as to the start and the end of an economic expansion or contraction cycle.
When consumer staples suddenly surge unexpectedly and begins to dramatically outperforms consumer cyclical/discretionary it can foreshadow an impending economic contraction/slowdown and/or a stock market correction/bear decline. Conversely, when consumer cyclicals outperform the consumer staples it tends to suggest an expanding/recovering economy and hence a bull stock market cycle. Since the US economy is heavily influenced by consumer spending (over two thirds of US GDP) consumer demand for discretionary goods is dependent on the health of the economy.
Technically speaking, we have studied these relationships over the years and under different business/stock market cycles. Although it is very difficult to know with certainty the start of any recession it is important to recognize that wide discrepancies between consumer staples and cyclicals do not take place for no reason. It is often an indication of structural forces at work that leads to changes in economic and stock market cycles.
A brief review the S&P 500 Consumer Staples and S&P 500 Consumer Discretionary and a quick analysis on the relative strengths of these two sectors suggest that we may be headed toward an inflection point in both the US business cycle as we as the US stock market.
In the two prior US recessions (2001 and 2007-2009) and the subsequent bear markets in US stocks (Tech/Telecom bubble of 2000-2002 and 2007-2009 global financial debacle) there were wide discrepancies that developed in the relative strength charts of cyclicals vs staples specifically the negative divergences and confirmed technical breakdowns. The Oct 2018 reaction low in the cyclical vs staples relative strength chart and the 2009 uptrend will become increasingly important in the weeks and months ahead. A successful test reaffirms the basis for the continuation of the US economic expansion and the US stock market bull rally. However, a convincing violation of the Oct 2018 reaction and most important, the 10-year uptrend breakdown warn of an impending business cycle peak/stock market top.